FMCG companies on a roll, investors must still track these factors

The stocks of six leading fast-moving consumer goods (FMCG) companies have hit record highs in the past couple of weeks riding on good fourth quarter performances or on expectations that GST would bring them massive windfalls. HUL, ITC, Britannia Industries, Marico, Godrej Consumer Products (GCPL) and P&G Hygiene and Healthcare have all recorded highs in this month.

Markets are largely bullish on consumer stocks underpinned by a demand pick-up in the offing due to GST, especially in rural India on the back of a normal monsoon forecast. However, there are four factors that have the potential to make or mar the companies’ performance going ahead.

SMOOTH TRANSITION TO A GST REGIMEThe Goods and Services Tax (GST) is likely to ring in short-term disruption for the industry — the impact could be different for different companies. The June quarter performance will show the exact impact of the transition. HUL, for example, expects inventory pipeline correction of 100 to 250 bps in the current quarter ahead of the GST roll-out.

“While there will be disruption for around a month as the channel gets replenished with new inventory, improved efficiency in terms of logistics should add around 2% to the operating margin of FMCG companies this year,” said Ulhas Kamath, joint managing director of Jyothy Laboratories. In the medium term, companies could benefit in product segments like tea and staple foods that have large unorganised players competing.

“We are operationally ready for GST,” said Godrej Consumer Products in the company’s earnings call. “While there could be some temporary volatility in the channels around the GST implementation date as the trade adjusts to the new tax structure, we are confident that end-consumer demand will remain intact.”

COMPETITION FROM PATANJALIPatanjali, the gatecrasher into the league of large FMCG companies, continues to be a threat for its older peers. Colgate Palmolive’s market share in toothpaste declined in the fiscal 2017. In the March quarter, HUL’s oral care business was subdued. Some companies have also relaunched products — to better take on Patanjali or to cash in on renewed consumer preference for natural products. HUL re-launched CloseUp toothpaste, Jyothy Laboratories did the same with Margo soap and Emami has proposed a re-launch of its Zandu brand of products.

“I think some of the damage caused by Patanjali, particularly in honey, is now over and we are beginning to now regain some of the lost share,”said Sunil Duggal, CEO of Dabur, in the company’s latest earnings call. “I think market growth has absorbed a fair amount of Patanjali’s growth, a year ago Patanjali was really eating into shares of the existing players. I think the worst is behind us,” he added.

VOLUMES Vs. MARGINS

When volume growth shrank from double-digits, FMCG companies like HUL, Marico, GCPL, Dabur and Britannia focussed on margins. With forecast of normal monsoon, companies may be prompted to push rural demand while choosing to forgo some of the high level margins.

How well the companies attain the volume-margin balance would determine their valuation on the Street. For instance, in the March quarter, FMCG bellwether HUL managed to strike the right balance — leading to the Street turning more bullish about the company’s prospects.

VOLATILITY IN INTERNATIONAL OPERATIONS

Except GCPL, international business has not been a very strong growth driver for Dabur, Marico and Emami, which acquired companies outside India a few years ago. While GCPL has had success in its international business, its largest business in Indonesia is facing growth issues now. For FMCG companies, economic slowdown in emerging markets, sharp currency devaluations in some countries and political instability in others have hindered growth.

Sachin Bansal, Binny Bansal, sales director Hari, accounts managers Sumit Anand and Sharauque among other employees have been named in the FIR registered on the basis of a complaint lodged by Naveen Kumar, owner of Indiranagar-based C-Store Company.